- Investors can put their cash to work in a myriad of ways including money market funds, CDs, high yield savings accounts and ultra-short bond funds.
- Brokerage firms sweep their customers' uninvested cash into various vehicles, including bank sweep accounts and money market funds.
- Understanding the differences can help you make the choice that's right for you.
Cash is an important part of many investors' portfolios, just like stocks and bonds. Indeed, according to Federal Reserve data, Americans had $19.4 trillion sitting in cash in various types of accounts at the end of last year. And while the variety of options for how to manage your cash may be smaller than those for investing in stocks or bonds, you do have choices.
For the cash in your long-term investment accounts, the choices range from money market mutual funds, to CDs, to high yield savings accounts, and even ultra-short bond funds. But what about uninvested cash in your brokerage account—including those flows of cash resulting from deposits, cash dividends, and security transactions—and money you may be holding as you wait to invest? At most brokerage firms, this cash is held in sweep accounts.
Bank sweeps and money market funds
Here are 2 common ways that brokerage customers can earn interest on their uninvested cash, each with different features.
One option is a sweep that automatically deposits your money into a bank. These deposits typically are insured by the federal government through the Federal Deposit Insurance Corporation (FDIC), which guarantees principal and interest within certain limits. For example, Fidelity's Cash Management Account is an option for investors seeking FDIC insurance. It also offers checking, bill paying, and ATM access.
Another way that brokerage firms pay clients for their uninvested cash is by sweeping it into money market funds. While these do not offer insurance by the FDIC, they are relatively safe options, as the securities in the account are insured by the Securities Investor Protection Corporation (SIPC) up to $500,000. SIPC is a nonprofit organization that protects stocks, bonds, and other securities in case a brokerage firm goes bankrupt and assets are missing, but it does not insure against the failure or insolvency of the money market fund itself.
Money market funds also typically pay higher interest rates than bank sweeps. For example, as of November 26, 2019, the 7-day yield on Fidelity Government Money Market Fund (SPAXX) was 1.30%.* This fund generally invests at least 99.5% of the fund's total assets in cash, US government securities and repurchase agreements. Fidelity brokerage accounts that sweep to money market funds also offer check-writing, bill pay, and ATMs.
Performance data shown represents past performance and is no guarantee of future results. Investment return and principal value will fluctuate, so you may have a gain or loss when shares are sold. Current performance may be higher or lower than that quoted. Visit Fidelity.com/performance for most recent month-end performance.
How money market funds work
Money market funds are mutual funds that invest in short-term debt securities with low credit risk. These securities are issued by government entities or companies who borrow money and repay principal and interest to investors within a short period of time. There are 3 categories of money market funds—government, prime, and municipal.
- Government funds hold Treasury and other securities issued by the US government.
- Prime funds hold securities issued by US government as well as other domestic and foreign issuers.
- Municipal funds invest in debt issued by states, cities, and public agencies.
Investors should consider which combination of features is right for them, so they can make smart choices about managing their cash.
Next steps to consider
Find out more about how to manage your cash.
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